(12) mainstream neoclassical supporters of the New Consensus, New Neoclassical Synthesis, or New Consensus macroeconomics.

It is true enough that the degree of intervention increases as one goes down that list, e.g., Misesian capitalists support a minimal state and (like Mises) could use utilitarian ethics to justify certain interventions if these were deemed morally justifiable.

Towards the end, we have monetarists and conservative New Keynesians, who support the existence of a central bank to expand the money supply, but even they strongly oppose most other government interventions. Monetarism is certainly less “laissez faire” than, say, Misesian minimal state capitalism, but it still has a strong belief in the self-correcting power of free markets.

I put “Rothbardian anarcho-capitalism” as the first on my list, but in reality its position there is questionable. Why? The reason is that Rothbardianism opposes even private capitalist fractional reserve banking, but its arguments for doing so are utterly flawed, wrong or just plain ignorant. In its opposition to fractional reserve banking, Rothbardianism is actually profoundly anti-capitalist and (on its own principles!) would require coercive violations of private property rights and free contract.

A “laissez faire” economy is obviously a form of capitalism, but capitalism is itself a broader term that includes more economic systems than just “laissez faire” ones. If capitalism is defined as a system where all or most commodities are produced privately, with mostly privately owned capital goods, private profit and loss, but with some varying degrees of government interventions, then even an economy run with Post Keynesian economics would be “capitalist.”

I would place the dividing line between “laissez faire” capitalism and “interventionist” capitalism with “left” New Keynesianism, though others might dispute this, given New Keynesianism’s general and deep neoclassical foundations and assumptions. The highly neoclassical (or what might be called “conservative”) New Keynesianism of N. Gregory Mankiw and others that doubted even the effectiveness of fiscal policy is probably to be regarded as a type of laissez faire monetarism.

Hence “interventionist” capitalists can be conceived as follows.

(1) left New Keynesians;

(2) old neoclassical synthesis Keynesians (Old Keynesians);

(3) Post-Walrasians

(4) some old American Institutionalists (such as John Kenneth Galbraith);

Once we get to economists who advocate central planning of most or all goods and services and government ownership of most or all capital goods, we have crossed over from capitalism into command economy socialism. These economists include the various types of Marxists.

The problem with mainstream economics since the mid-1970s has been that it shifted from old neoclassical synthesis Keynesianism back towards more “laissez faire” neoclassical theory such as Friedmanite monetarism, New Classical economics, “conservative” New Keynesianism and the strange neoclassical hybrid that emerged in the 1990s we call the “New Consensus,” “New Neoclassical Synthesis,” or “New Consensus macroeconomics.”

This consensus neoclassical theory has gone by the name of “globalization,” “neoliberalism,” or the “Washington consensus.” Its spectacular failure has been seen in the financial crisis of 2008, the resulting global great recession and continuing economic malaise. Long before this, however, it was wreaking havoc in the Third World, with the exception of China and East Asia, which has generally (though not completely) rejected the strong form of neoliberalism.

40 comments:

Interesting post! I've always thought "free market" was a really vague term anyway when there are arguably many degrees and forms of these kinds of policy prescriptions. Paul Krugman once described himself as a free market welfare state economist here.

http://www.youtube.com/watch?v=_BjN8AY2y0U

It also must be incredibly annoying to have your views straw manned and conflated with systems that you've never advocated for like "socialism" or "communism."

"Laissez-faire is an economic environment in which transactions between private parties are free from government restrictions, tariffs, and subsidies, with only enough regulations to protect property rights."

I gather some libertarians would like to redefine the term to mean a wonderful world where suddenly there are no business cycles, no unemployment, no economic problems of any kind, and where magical flying unicorns dance around all day long to the sound of music!

* In (1) above obviously it refers to Rothbard's system which involves abolition of government.

So I am a little confused as I am trying to follow this discussion across the blogs and here now.

So if there are "degrees of laissez faire", how do we know when a situation or thinker/school is "sufficiently" laissez faire to be considered laissez faire and not something else? This is why I was asking how we distinguish between laissez faire and not-laissez faire things.

For example, I would guess that the Russian experience under the USSR regime was not sufficiently laissez faire to count, although it was not 100% totalitarian despite some pundit's treatments of it. And I remember you have said that the USA before the financial crisis was a laissez faire environment even though there is clearly some amount of government interference in economic affairs even at that time.

So how do you distinguish the two? Is there a cut off point or threshold and if so, where is it? Is it a gut feel thing?

The reason it is an interesting question to me is that if we admit there are "degrees of laissez faire" it becomes confusing for me to know when laissez faire is to blame for an outcome versus, say, government interference which is operating alongside it?

I would place the dividing line between “laissez faire” capitalism and “interventionist” capitalism with “left” New Keynesianism, though others might dispute this, given New Keynesianism’s general and deep neoclassical foundations and assumptions. The highly neoclassical (or what might be called “conservative”) New Keynesianism of N. Gregory Mankiw and others that doubted even the effectiveness of fiscal policy is probably to be regarded as a type of laissez faire monetarism.

As for what was to blame for the crisis, it is not difficult to see the results of neoclassical financial deregulatory measures, failure to act when asset bubbles occur and allowing unsustainable levels of private debt.

Okay, now I understand better WHERE you think the line should be drawn, but I am still unclear as to WHY you think the line should be drawn there?

If the definition of laissez faire is "a doctrine opposing governmental interference in economic affairs", how would any viewpoint suggesting a role for government in economic affairs meet the criteria in the definition and thereby qualify as "laissez faire"?

Do you see why I am confused? I don't understand what principle can be used to determine when a person or doctrine is "sufficiently laissez faire" to be called laissez faire and when it is "insufficiently laissez faire"? I see where you drew the line but I don't see what principle you used to draw it.

Could you tease that out a bit more please for the edification of your readers?

The criterion for deciding what should count as laissez faire economics and not is whether the economic theory in question says that markets are self-correcting and naturally converge to state of order. For neoclassicals, that "state of order" towards which the economy allegedly tends is Walrasian general equilibrium.

For Austrians it is Mises's "final state of rest" or Hayek's plan coordination.

All these economics theories say that this convergence happens naturally and government interventions will generally only impede it.

Economic theories that reject the idea of a natural market convergence to some "state of order" -- either full employment Walrasian general equilibrium or some Austrian state of order -- say that, on the contrary, moderate government interventions are required to make a market economy function well.

This is how and why one should draw the line roughly -- and I say roughly -- at left New Keynesianism, which at least has some grip on reality and recognises downwardly rigid prices and wages and lack of market clearing and calls for fiscal stimulus.

Of course, New Keynesianism is still flawed by its underlying neoclassical assumptions and foundations.

Would it make sense to break down a given theories components and policy prescriptions individually as "laissez faire" or "not laissez faire" based on this terminology?

For example, if an individual believes markets are self-correcting in all areas except the monetary system and therefore they call for government intervention in this area (market monetarism?), would it make sense then to label their monetary views as "not laissez faire/interventionist" while all their other economic views are "laissez faire"?

Or do their monetary views get labeled "laissez faire" as well because most of their other views are laissez faire?

If one wants to label each individual component of each economic theory as "laissez faire" or not, fine.

But the overall categorisation of each whole theory itself as essentially laissez faire or not still makes sense.

By the way, pure "laissez faire" -- in the sense of demanding no interference or coercion of any kind in market exchanges or society -- is impossible, because it would reduce to literal anarchy with no rules. E.g., even the Rothbardians demand a private law code and private justice to provide the basis of market order, and that private law code would require coercion and violence to maintain order; it is just that the coercion would be done by private protection agencies.

Okay, I think I follow so far but I want to keep checking because I am new at this and still trying to wrap my head around all of it.

You said that individual components of an economic theory can be labeled as "laissez faire" or not, according to the definition you provided of laissez faire meaning "opposing governmental interference in economic affairs".

You also said that no "pure laissez faire" environment exists, nor could it.

This must mean that all economic phenomena we witness must involve some mixture of "laissez faire" and "not laissez faire" elements.

If that is the case, I am still uncertain as to what principle can be used to decide which element is to blame for a particular outcome observed?

For example, you talked about financial market deregulations leading to the financial crisis. But this did not create a "pure laissez faire" system, but rather a system that was still marked by some elements of "laissez faire" and some elements of intervention.

The claim that certain schools of thought put forth is that it is these remaining elements of intervention which serve to corrupt or otherwise distort, I guess would be the word, the economic outcomes and therefore they are to blame. But from your framework it is not these remaining interventions which explain the outcomes, but the extent of the economic environment that remains "laissez faire" to some degree.

I am trying to determine what principle we can use to independently analyze these empirical data. It seems like both frameworks have a fair claim to their point of view. There must be some objective principle one can use to distinguish which element (the laissez faire or the not laissez faire) should take primary responsibility for the outcomes observed. What is that principle?

"This must mean that all economic phenomena we witness must involve some mixture of "laissez faire" and "not laissez faire" elements.

If that is the case, I am still uncertain as to what principle can be used to decide which element is to blame for a particular outcome observed?"

That is an empirical question.

E.g., what happens when you loosen regulation on financial systems and allow them to pump out credit to asset speculators or highly risky -- if not outright fraudulent -- loans (liar's loan and NINJA loans) to consumers? You just saw the outcome in the 2000s.

And I am not claiming above that all government interventions can never fail. Certainly some government policies are poorly designed and have bad results. But that is an empirical question too.

I understand it's an empirical question. That is what I am asking about. Empirical data is subject to interpretation. It doesn't seem to tell a story all by itself.

The example you point to (2000s financial bubble) is precisely what I am so confused about because by your explanation above this is not an example of a "pure laissez faire" environment, it is some mixture of "laissez faire" and "not laissez faire". Your claim is that it is a clear demonstration of the problems of laissez faire. But I am not understanding why you've chosen to single out this element (out of the two) for blame. What principle do you use to eliminate the possibility that, while regulations were changed (suggesting it was something to do with the "laissez faire" element), it couldn't possibly be the influence of the remaining regulations which were responsible for producing the outcomes observed?

It is confusing for two reasons:

1.) The regulatory changes didn't happen in a vacuum where they were the only variable that changed; other interventions continued to exist or were added where others were removed or changed.2.) The example you just gave seems to conflate the existence of fraudulent/criminal behavior with "laissez faire". But you said earlier that "pure laissez faire" means "no rules and no law", so I take it to mean the way you are using "laissez faire" would include some system of rules and law, which would mean that anyone who chooses to act against those rules/laws, would not be "laissez faire agents", if that makes sense. It seems lawbreakers are being blamed on "laissez faire" and I don't see what the connection is when your definition of laissez faire includes rules and laws.

"Your claim is that it is a clear demonstration of the problems of laissez faire. "

My assertion is that it is a clear demonstration of the problems of current mainstream neoclassical theory -- the so-called New Consensus, aka New Neoclassical Synthesis, or New Consensus macroeconomics -- not "pure" laissez faire or Rothbardian anarcho-capitalism, or Misesian minimal state capitalism, or free banking, etc.

I am well aware -- and have said so above -- that state interventions exist even in New Consensus economics and modern economic systems.

"What principle do you use to eliminate the possibility that, while regulations were changed (suggesting it was something to do with the "laissez faire" element), it couldn't possibly be the influence of the remaining regulations which were responsible for producing the outcomes observed?"

I've already told you: empirical evidence. For example, business cycles involving asset bubbles and dynamics of debt deflation were ubiquitous before the late 1930s when financial regulation was minimal, e.g, Australia in the late 19th century:

Or US and European business cycles in the 1870s and 1890s. Is this some random accident? No. The Great Depression was merely the biggest and most disastrous example of this type of business cycle.

After the 1930s down to the about 1980s, financial systems were regulated in ways that stopped large flows of credit to asset speculators. Investment banks and commercial banking functions were separated, capital gains tax policy tended to de-incentivise speculative activities, aggregate demand management provided relative stabilization of employment and GDP, and so on. The type of business cycle involving asset bubbles and dynamics of debt deflation virtually disappeared. Coincidence? No.

Then a wave of neoclassically-inspired deregulation followed from the 1980s. This type of business cycle re-emerged. The UK had one after Thatcher's "Big Bang" and the Lawson boom. Japan had a massive property bubble in the 1980s after financial deregulation and it collapsed causing their "lost decade". The 2000s US property bubble was just the last and most devastating of these cycles.

" The example you just gave seems to conflate the existence of fraudulent/criminal behavior with "laissez faire""

However, mere pumping out of credit to speculators is not fraudulent/criminal behavior. Credit dynamics in poorly regulated financial systems that create asset bubbles are not. Frenzied speculation on asset prices is not fraudulent/criminal behavior. These destabilising aspects of poorly or ineffectively regulated market economies are not.

I understand that there are different types of business cycles with different compositions of "laissez faire" and "non-laissez faire" elements in the background of each. I understand how the unique composition of these elements can influence the development and outcome of each business cycle observed.

What I do not understand is what principle you use to determine that it is the "laissez faire" element which is to blame in some/all business cycles, when these business cycles also have elements of non-laissez faire (intervention) present at the same time.

Empirically, it seems we can say "These mixtures of laissez faire and non-laissez faire tend to produce these business cycle outcomes", but I am not sure how it is empirically demonstrated that "laissez faire" is the reason there are business cycles of one variety or another.

It seems like you are using some other principle or analytical system to arrive at the conclusion that the problem is the "laissez faire" element, not the "not laissez faire" elements that are involved.

It is confusing because other schools of thought claim the business cycles verify their framework empirically because they make the same observation you do, but in reverse. Whereas you say, "See, laissez faire!" they say, "See, government intervention!" Each is able to interpret the empirical evidence (which is the same and objective no matter who looks at it) in his own way.

It would seem it has to be settled some other way in terms of deciding which judgment/interpretation is the correct one, than merely appealing to the existence of observed phenomena.

So again, I ask, what additional principle do you use to decide, conclusively, that the interpretation you use to place the responsibility on "laissez faire" not "not laissez faire" is the correct one? Are you suggesting that if you had never studied economics before (of any school of thought) and merely looked at the data of the 2000s business cycle period, you would arrive at the same conclusions about the role of "laissez faire" versus "not laissez faire" element contributions as you have arrived at today having actually studied economic theory ahead of time?

"What I do not understand is what principle you use to determine that it is the "laissez faire" element which is to blame in some/all business cycles, when these business cycles also have elements of non-laissez faire (intervention) present at the same time."

Look at the consequences of the "laissez faire" elements and interventionist elements. See what happened in the real world. Of course the real world is messy and complex, but our social sciences are capable of explaining messy and complex systems.

"It seems like you are using some other principle or analytical system to arrive at the conclusion that the problem is the "laissez faire" element, not the "not laissez faire" elements that are involved."

Of course, I am using an "analytical system". I use a prior theory in explaining how market economies work when I look at empirical evidence in any particular episode or period called Post Keynesian economics, even though of course some of its content is not substantially different from other economic models.

However, I have little doubt that my theory and its various assumptions have been empirically verified, and that in the end Post Keynesian economics -- and heterodox Keynesian theory generally -- provides a better model of how real world market economies work.

Or are you saying how do I know my arguments work? Because I think I can show they are valid and sound (non-fallacious) arguments, using a prior well established theory, and I can discern outcomes of laissez faire policies in action when empirical evidence is available.

Did you read my post on Australian free banking in the late 19th century?:

I don't have an economic world view and I am not a libertarian. I am attempting to form an understanding of these issues being new to them and I am trying to follow the logic of all parties to see where it leads. I like to think the only partisanship I have is toward sussing out the truth, whatever it may be, but I suppose someone could accuse me of politics despite my best efforts?

I was attempting to make sense of all of this so that I may have an "economic world view". I wanted to try to be empirical, or scientific, as it were, as I approached these things, but I am finding that my understanding of what that means is difficult to apply, at best, when it comes to economic reasoning.

The trouble I am having is that there are so many variables. I just read your Australian banking post that you linked to, here is what I noticed:

1.) Your analysis of the era starts with the end of British Treasury regulation or oversight, and it looks only at the Australian banking system by itself. There is no inquiry into the conditions of the banking system leading up to the time that the British Treasury removed itself. There is also no inquiry into banking dynamics in other countries during the same time period. It seems to me possible that the conditions of the banking system before the British Treasury stopped providing oversight could have something to do with influencing the conditions that came afterward (that is, the period you look at did not suddenly pop into existence from nowhere, it had a certain structure to it beforehand). Additionally, it strikes me as possible that developments and policies in other banking systems could have had an influence on developments in the Australian system, in so far as Australia's market and/or banking system was interlinked with other world economies at that time. Now I am not a historian of Australia but to my knowledge at this moment I don't recall Australia being detached from world markets or special economic systems (such as banking) by government decree or mass individual choice at this time. So, this seems like a hard one to isolate the variables on, just like any other empirical example.2.) I notice that you got into a bit of a tiff with someone in the comments. They seemed to be attempting their own empirical analysis and interpreted the observed economic phenomena a different way than you did. I wasn't clear on what was "not empirical" about their method-- you seemed to take issue solely with how they interpreted the data. I noticed that where your opinions on how to interpret the data differed, you focused on labels used and were upset that they couldn't tell you whether various examples they gave constituted "free banking" situations ex ante. In this case, you argued that various government regulations existed which meant that the examples they gave were NOT "free banking" episodes. This is similar to how you have cited the business cycle of 2000 in the United States as an example of the failures of "laissez faire" and I have pointed out that there were also elements of "not laissez faire" present (by your own admission) and thus it was hard to decide whether it was "sufficiently laissez faire" to place the blame on those elements. This is why I have repeatedly searched for a guiding principle that allows one to decide conclusivey, ex ante, whether an episode is "laissez faire" or "not laissez faire" and thus where the blame should go.

You tell me to look at the consequences of the laissez faire and interventionist elements. But I don't see how you're able to isolate the variables in this way! Because you admit there is no such thing in existence as a "pure laissez faire" environment to test against, I am confused as to how one can be certain that what one is witnessing is not just various iterations of economic disaster caused by interventions of various magnitudes and styles, because these elements are always present as well!

There must be something else you bring to our observation besides just your eyes in observing phenomenon. If that were not the case I am not sure how one could even argue they've found a theory in studying these empirical data sets because the variables, as you've mentioned before, change each time. I can't see how variables are strategically isolated and kept constant so an empirical test can be run to confirm that it is X, not Y, that is causing Z.

Now my confusion deepens because if I have read your latest comment correctly, you are saying that that additional tool of analysis or principle you use is a pre-existing theory called Post Keynesian economics.

Well, if that is the case then there seems to me to be a problem here. We are saying, "This theory is vindicated by the empirical evidence" but we are also saying, "This evidence is interpreted through the theory". If that is the case, are you not engaged in a circular argument? It seems to be the form of "A is true because of B, and B is true because of A" where "A" is your theory and "B" is your interpretation of the evidence.

(1) you keep saying above that there is no "pure" laissez faire in the real world, as if I have argued or assumed that "pure" is to blame for real world problems. I have done no such thing, but made it clear that systems with relatively greater degrees of "laissez faire", even though they have some government interventions, lead to certain problems.

(2) "You tell me to look at the consequences of the laissez faire and interventionist elements. But I don't see how you're able to isolate the variables in this way! "

Of course you can. Observe any historical episode where bank runs occur in a fractional reserve banking system backed by no effective lender of resort. The consequences are financial system collapse, mass loss of demand deposits, collapse of credit and investment and collapse of aggregate demand.

(3) We are saying, "This theory is vindicated by the empirical evidence" but we are also saying, "This evidence is interpreted through the theory". If that is the case, are you not engaged in a circular argument?

The circularity is not vicious in the sense of logical fallacies.

Modern medicine is a theory used to diagnose and treat empirically observed symptoms and problems with the human body. Of course, in the act of diagnosis and prescription of treatment the doctor must rely on preexisting medical theory and assumptions about the human body, its biology and biochemistry, which have been confirmed empirically, e.g., that if someone has lost of lot of blood, they will show certain symptoms, and will require a blood transfusion and that people have different blood types and one must get the type right and so on.

Is there any vicious circularity here? Here. This is how both natural and social sciences work.

You sound like you do not believe in empirical evidence, frankly.

(4) As for the Australian banking episode, if you think foreign monetary or banking systems with government interventions were major cause of its bubble and depression, explain how.

That Josef Mannerheim is asking for a "principle" says to me that he's influenced by libertarian thought on the ethics or morals of "govt intervention". That some grand principled summary-idea should reign.

Empirical evidence includes stuff like Steve Keen looking at the level of private debt load vs GDP in various western economies that experienced a Crash, not Austrian boom & bust business cycle, and that the private debt load consisted largely asset speculation, mostly in housing. The previous bubble was in the stock market, the Dot Com IPO bubble, in which stock of new companies that had zero revenue and often zero sales was bid up to extreme highs that had little or nothing to do with classical production.

House prices in the 2nd bubble had little relation to general production, prosperity, jobs, and the means to make the house payments. The ability to finance skyrocketing house prices, which are shown to have accelerated at a much faster rate than previous to 2000, and the acceleration or prices and debt accelerated, was based on the idea that future gains would be the source of equity to refinance previous debts. This is precisely what Minsky described as sane "hedge" markets evolving into "Ponzi Finance" over time.

The private debt to GDP in the US in the Great Depression was 175%. The private debt to GDP in the Great Recession was 303%, but was followed by more govt intervention to halt the collapse than the first time.

These are empirical observations.

There's a counter-narrative that Govt "forced" banks to lend to unworthy borrowers, but that is completely debunked as a LIE which was constructed for convenience, since MOST lending was not originated by banks but by unregulated mtg cos that were not covered under banking rules or CRA (Countrywide), then later sold off to banks, and CRA itself didn't "force" banks to make fraudulent loans, it merely suggested to larger banks that if they intended to enjoy large mergers and acquisitions, they ought to serve a more general public purpose than max profits, by serving poor communities instead of only cherry-picking more expensive suburban or ex-urban properties and ignoring low-prices urban mortgages. None of that constitutes "force" since no one was forcing banks to do mergers, and these were guidelines that were loosely considered when approving mergers.

The convenient LIE arguments also have a faulty view of how banking, credit, and the Federal Reserve functions OPERATIONALLY. The conventional view is that the Fed provides "base" capital that banks lend at some Fractional Reserve formula, that banks are constrained in lending by Reserves. Provably and proven false, many sources, that's not how banking works, and banks are not so constrained by the Central Bank.

Banks are constrained only by their OWN estimation of their "net capital assets". If they LIE to inflate their assets and there's no regulators to investigate and call 'foul', neither the Market nor the bank itself will reduce the risks they pursue. Bank lending is constrained by customer Demand for credit and the willingness of banks to take on more Risk for more Profit. See William Black on "accounting control fraud".

Another argument is that the Fed forced interest rates too low. With the way banking operates, the 'natural' level of 'base' interest rates for inter-bank lending is ZERO. The actions of the Fed are to prop up interest rates ABOVE zero. This is because bank lending creates Reserves, and surplus Reserves pushes down rates.

(continued) then the general PRINCIPLE involved here is to first be HONEST and ACCURATE about how banking, credit, Central Banks, Treasury, etc. operates in an environment with a free-floating nominal value currency, one that is not "fixed" by "political fiat" (govt orders) to a certain commodity price or ratio, particularly a national monetary system that has an independent "sovereign" central bank and is not dependent on "foreign" borrowing in another non-national currency, including the EU countries which rely on the ECB regime and arbitrary rules, or any country dependent on loans payable only Dollars or Silver, or otherwise pegged to another foreign currency.

The principle is to be HONEST about cause vs effect and not shape answers and reasoning by "APRIORI" assumptions to fit pre-determined conclusions, but instead observe operations and results and data, study the data in testable ways, don't engage in logical fallacies, and arrive at sensible conclusions ... and prescriptions.

(continued) if there's a general PRINCIPLE involved here, it's to first be HONEST and ACCURATE about how banking, credit, Central Banks, Treasury, etc. operates in an environment with a free-floating nominal value currency, particularly a national monetary system that has an independent "sovereign" central bank and is not dependent on "foreign" lending in another currency, including the EU countries dependent on ECB and arbitrary rules, and on Bond Traders, including countries that accepted debts which were payable ONLY in US Dollars or some foreign currency, and thus required obtaining said foreign currency in markets and via trade to be able to repay foreign loans.

The principle is to be HONEST about cause vs effect and not shape answers and reasoning by "APRIORI" assumptions to fit pre-determined conclusions, but instead observe operations and results and data, study the data in testable ways, don't engage in logical fallacies, and arrive at sensible conclusions ... and prescriptions.

All I have done is observed that because there is no pure laissez faire society in the world, nor has there been nor maybe will there ever be, every analysis of observed economic fact involves examining events taking place in a "mixed" world with elements of laissez faire and not laissez faire. Your writings invariably place all blame for the problems you describe on the element of the system that is laissez faire. It seems impossible for you to even imagine that the not laissez faire element could be primarily to blame for an observed result.

Because I see no way to isolate these elements in a controlled way, much as you could in a chemistry experiment, for example, to test which element has which effect, it appears that conclusions arrived at with regards to influencing the effect of these elements boils down to use of another analytic principle other than simply staring at empirical data. The data themselves do not tell us anything conclusive.

What you have told me above is that you use your pre-existing economic theory, which you refer to as Post Keynesian, to interpret the empirical evidence and arrive at conclusions. I then asked you how you knew that this theory was valid and you told me because it was empirically verified.

Well, that seems like circular logic to me: I can interpret data using my theory, and I know my theory is true because the data tells me it is. I don't understand how a competing school of thought couldn't make an identical, circular claim, which would take us back to square one.

In a medical scenario, one can operate controlled experiments. One can control one item and then observe how outcomes differ in each "experiment" conducted based upon the variable that is changed. This doesn't at all seem to be the case with economic events. You can witness one episode and see the "settings" for the elements of laissez faire and not laissez faire, but you can not go back and re-run the "experiment" again with the settings changed to see how your outcome differs.

In every case observed, because no "pure laissez faire" can be isolated and observed independently, I don't see how one can arrive at the conclusion it is elements of laissez faire which are to blame for the outcome, without relying on a pre-existing theory that laissez faire is to blame, to interpret such data (a theory, I should hope I don't have to add, which is supposed to be valid because it has been "verified" by the very data it is attempting to interpret).

It is distressing that you think it is MY job to explain how the elements I mentioned in the Australian banking crisis episode affected the developments. I should think it should be YOUR job to explain how they are not impactful. I didn't realize you have authority to throw out data and variables, or neglect to study their effects, whenever you feel like it. That is empirical science?

I don't see any reason to respond to Gary. I find it offensive that I am facing accusations again when I have said before I am trying to understand this as a person who is unfamiliar with these issues. I am going off of what I thought was "common sense" but it seems I have ruffled some feathers merely by being inquisitive. This seemed like an academic and intellectually curious environment but maybe I have made a mistake in thinking so.

The principle is to be HONEST about cause vs effect and not shape answers and reasoning by "APRIORI" assumptions to fit pre-determined conclusions, but instead observe operations and results and data, study the data in testable ways, don't engage in logical fallacies, and arrive at sensible conclusions ... and prescriptions.

Yes, which is precisely my concern with the approach Lord Keynes advocates above and which is what I mean when I refer to additional analytical principles. If you want to avoid a priori reasoning, then you can not utilize an analytical principle (Post Keynesian theory) to interpret empirical data when that analytical principle (Post Keynesian theory) is claimed to be valid BECAUSE it has been validated by the empirical data in question.

That is circular logic and a contradiction. So far, I have not seen anyone explain how this contradiction is resolved. As a student of these issues I am concerned that my "professors", as it were, would ask or expect me, when confronted with a seeming contradiction, to just accept it and carry on my way.

(1) "It seems impossible for you to even imagine that the not laissez faire element could be primarily to blame for an observed result."

False. In fact, I admitted above that I do not regard all government interventions as infallible. E.g., protectionism can certainly be a bad policy in some cases.

(2) What you have told me above is that you use your pre-existing economic theory, which you refer to as Post Keynesian, to interpret the empirical evidence and arrive at conclusions. I then asked you how you knew that this theory was valid and you told me because it was empirically verified.

Well, that seems like circular logic to me:

That is because you apparently do not understand that only "vicious" circularity is a problem in argument and logic. There is nothing problematic about using a theory verified by empirical evidence to interpret further and DIFFERENT empirical evidence data.

In fact, you have already tacitly conceded that your invalid "circular logic" charge is nonsense when you failed to dispute the validity of my medical example.

(3) "Yes, which is precisely my concern with the approach Lord Keynes advocates above and which is what I mean when I refer to additional analytical principles. If you want to avoid a priori reasoning, then you can not utilize an analytical principle (Post Keynesian theory) to interpret empirical data when that analytical principle (Post Keynesian theory) is claimed to be valid BECAUSE it has been validated by the empirical data in question."

I am not using the SAME empirical data.

And do you even know what a prior reasoning is?

Technically a statement known a priori is one known as true independently of experience, e.g., "All bachelors are unmarried" is true by virtue of the terms used.

Post Keynesian economics is not known a priori, but empirically. Its statements, specific theories or assumptions are generally synthetic propositions known a posteriori.

What you are doing is using "a priori" in the sense of "assuming something as true without evidence". But I am doing no such thing.

If what you have said above were true -- that a prior empirically confirmed theory cannot be used to interpret some other empirical data -- then all of human natural and social sciences would fall apart.

Because I see no way to isolate these elements in a controlled way, much as you could in a chemistry experiment, for example, to test which element has which effect,

Of course, you can find instances in the real world that isolate effects of different policies.

Compare

(1) one country with a fractional reserve banking system with no central bank during a banking crisis, e.g., Australia 1890s

with

(2) another one country with a fractional reserve banking system in a comparable banking crisis but WITH a central bank acting as a lender of last resort, e.g., the UK in the 1890s during the Baring crisis.

Or compare nations with similar recessions, one with fiscal policy and the other without fiscal policy.

Or what happened when a nation abandoned the deflationary gold standard in 1931 with a nation that did not.

What was the original Post Keynesian experiment conducted to empirically verify the first molecule of Post Keynesian theory? And how did the experimenters manage to isolate the variable under study given the challenge I believe exists in such an operation which I have described above?

It is also the ecological economics question, being usually with mistrust towards both, market and the state (Martinez Alier), that deffend some kind of communitarian utopia, indigenism and so on. And people like Ivan Illich, the former Gintis and Bowles, et cetera.

"We have been using the term ‘planning’. But the concept itself needs to be more precisely defined. Planning is not equivalent to ‘perfect’ allocation of resources, nor ‘scientific’ allocation, nor even ‘more humane’ allocation. It simply means ‘direct’ allocation, ex ante. As such, it is the opposite of market allocation, which is ex post. These are the two basic ways of allocating resources, and they are fundamentally different from each other—even if they can on occasion be combined in precarious and hybrid transitional forms, which will not be automatically self-reproducing. Essentially they have a different internal logic. They generate distinct laws of motion.They diffuse divergent motivations among producers and organizers of production, and find expression in discrepant social values.Both basic kinds of labour allocation have existed on the widest possible scale throughout history. Both are therefore quite ‘feasible’. Both have also been applied in the most variegated fashions, and with most diverse results. You can have ‘despotic’ planning and ‘democratic’ planning (those who deny the latter have never looked at a pre-colonial Bantu village). You can have ‘rational’ planning and ‘irrational’ planning. You can have planning based on routine, custom, tradition, magic, religion, ignorance—planning rules by rain-makers, shamans, fakirs and illiterates of all kinds. Worst of all, you can have planning directed by generals; for every army is based on an a priori allocation of resources. You can likewise have planning organized in a semi-rational way by technocrats or, at the highest level of scientific intelligence, 'by workers and disinterested specialists. But, whatever their forms, all of these involve direct a priori allocation of resources (including labour) through the deliberate choice of some social body. At the opposite pole is resource allocation through objective market laws that a posteriori counteract or correct previously fragmented decisions taken by private bodies, separately or autonomously from each other.Similarly, market economies in the sense of ex post allocations of resources have historically existed in the most variegated forms. In principle, there could be market economies with ‘perfect’ free competition: though in practice this has hardly ever been realized. There can be market economies skewed by the dominance of powerful monopolies able to control large sectors of activity and so to fix prices over long periods. Markets can coexist with drastic forms of autocracy and despotism—as they did under eighteenth-century absolutism, nineteenthcentury tsarism, not to speak of various sorts of military junta or fascist dictatorship in the twentieth century. But they can also be combined with advanced forms of parliamentary democracy, as they have been in the latter half of this century—if in less than twenty countries out of the one hundred and fifty or so that comprise the capitalist world.Market economies may worsen the misery of broad masses, by an absolute lowering of their standard of living, as they did in most countries of the West for much of the eighteenth and nineteenth centuries, in Eastern Europe extending far into the twentieth century, and as they still do for at least half—if not more—of the inhabitants of the Southern hemisphere" Ernest Mandel- In Defence of Socialist PlanningNew Left Review I/159, September-October 1986

Markets with ‘perfect’ free competition are said to theoretically follow certain patterns leading to natural equilibrium.

Steve Keen is engaged in a process of proving empirically and mathematically using more abstract math and chaos theory that free markets with theoretical perfect competition and free choice DO NOT conform to pie-in-sky theories of Equilibrium, but rather engage in patterns over historical time that resemble Minsky's Instability Hypothesis.

That is, Stable Capitalist Markets gradually take on increasing levels of risk and gradually evolve into Ponzi Finance, all on their own. At the final stages before Financial Collapse, loan payments and return on investment rely entirely on Asset Inflation leading to Refinancing to capture said Asset Inflation, which is applied to previous debts at higher levels, until underlying dynamics can no longer service increasing Asset prices at all.

Approaching the Ponzi Finance stage, loan payments are not sufficient to pay off principle, but sufficient to make interest payments, then not even sufficient to make full interest payments, and "creative financing" agreements come to the fore, where both interest and principle payments are delayed until asset inflation "catches up", so re-financing can occur.

This Minsky theory from a few decades ago EXACTLY describes what happened up to the GFC in 2008.

And best not mention that Rothbard was in favour of wage-labour and that is hardly about leaving the worker alone -- not to mention his position on strikes (private police will not leave alone the picketing workers).

Makes you wonder what part of an-archy Rothbard found so hard to understand... but, then again, he was no anarchist or libertarian (in the tradition sense of the word, before Rothbard helped steal it for his authoritarian propertarianism).

It reminds me of Milton Friedman going on about there being a "free market" under Pinochet -- as if a situation were trade unionists would end up on a prison cell being tortured and killed could be considered as a "free market" in labour... but, then, workers are not really considered that important in these kinds of ideologies.

Do you think there is wiggle-room for Marxism? Seems to me Marxism is definitely not Capitalism, but it isn't neccessarily anti-Market.

My question: could a Libertarian-Left style Marxism be higher up on the "laissez faire" list than Post-Keynesian, and at the same time not be Capitalist? What I'm imagining here is a "free market" of worker-owned businesses that are sort=of privately owned, but as collectives… all competing in a market economy.

(1) Marxism, if it is advocating a command economy, is not capitalism, but if it is using demand-based signals and price signals to decide what to produce (a kind of consumer sovereignty) it has market elements.

(2) Whether left libertarianism involves private ownership of capital goods (that, small collective group ownership of capital) is questionable .

Sure, it looks it at first, and that it might be a form of capitalism, but then left libertarians say production decisions would be heavily democratic, so maybe not.

If the production decisions really are just all taken in a decentralised manner by worker-owned businesses themselves, then, yes, it looks like a market based system, almost a quasi-capitalism system.-------

You've hit the nail on the head here: certain market based forms of organisation are not incompatible with Marxism or state ownership of capital.

"In its opposition to fractional reserve banking, Rothbardianism is actually profoundly anti-capitalist and (on its own principles!) would require coercive violations of private property rights and free contract"